GST and telecommunications services

(Clauses 133, 134, 135, 136, 137, 138, 139, 140, 141 and 142)

Summary of proposed amendments

The amendments will clarify the GST treatment of cross-border supplies of telecommunications services by inserting a new place of supply rule, zero-rating provisions and definitions.

Although in policy terms it is clear that supplies of telecommunications services should be subject to GST in New Zealand when they are consumed in New Zealand, the general place of supply rule and zero-rating provisions in the Goods and Services Tax Act 1985 are not easily applied to cross-border supplies of telecommunications services. This leads to uncertainty as to when supplies of telecommunications services are subject to GST in New Zealand, and when they are not.

The amendments will reduce this uncertainty by inserting provisions dealing specifically with cross-border supplies of telecommunications services.

Application date

The amendments will apply from 1 July 2003.

Key features

Provisions will be inserted into the GST Act to determine to whom a supply of telecommunications services is made and the circumstances in which it will be subject to GST in New Zealand. These rules will be in addition to the general place of supply rule in section 8(2), which is based on the residence of the supplier. They will, however, override the proviso to section 8(2), which deems there to be a supply in New Zealand in certain instances when a service is physically performed in New Zealand.

The amendments to section 8 will:

• Deem there to be a supply of services in New Zealand when a person physically in New Zealand (other than a telecommunications supplier) initiates (including on behalf of another person) a supply of telecommunications services from a telecommunications supplier outside New Zealand (the "physical location" test). This will require an offshore telecommunications supplier who makes more than $40,000 of supplies to persons in New Zealand (other than telecommunications suppliers) to register for GST here.

• When use of the physical location test is impractical for a class of customer or service, deem there to be a supply of services in New Zealand when a person with a billing address in New Zealand initiates (including on behalf of another person) a supply of telecommunications services from a telecommunications supplier outside New Zealand (the "billing address" test).

• Require the billing address test, if used for a member of a class of customer or service, to be used consistently for all members of that class of customer or service.

• Clarify which party initiates collect calls and conference calls.

• Allow the Commissioner to clarify in other situations where a call is initiated.

Section 51 will be amended to provide that non-resident telecommunications suppliers do not have to register for GST solely as a result of making supplies that section 8(5) or 8A treats as being made in New Zealand to persons who are not resident, but who are physically in New Zealand. This will ensure that non-resident cellular phone companies do not have to register for GST in New Zealand solely because they make supplies of telecommunications services to non-resident customers "roaming" in New Zealand.

New provisions will zero-rate supplies of telecommunications services made:

• by New Zealand telecommunications suppliers to non-resident tele-communications suppliers when a telecommunications service is initiated outside New Zealand; and

• to non-resident persons, other than telecommunications suppliers, when a telecommunications service is initiated outside New Zealand.

For purposes of clarification, a definition of "telecommunications services" is proposed. This will extend the application of the amendments to the provision of access to global information networks (the Internet).

Background

The nature of telecommunications services means that it can be difficult to state with certainty where the services are performed. Determining where services are performed is of particular importance as in many instances the rules in the GST Act (for instance, section 8(2)(a) and section 11A(1)(j)) look to where a service is physically performed to determine its treatment.

The concept of physical performance does not fit well with the nature of telecommunications services. Overseas case law suggests that the physical performance of telecommunications services takes place where the telecommunications equipment (such as satellite dishes and exchanges) used to provide the service is situated.[6]

The physical performance test can be particularly difficult to apply in cases where cross-border telecommunications services are supplied, as in many instances the suppliers of the services will have equipment located in both countries (such as a satellite station) to complete the "circuit" needed for a telephone call.

There can also be uncertainty as to who is receiving the supply of telecommunications services. For example, in an international call between two consumers, either fixed line or mobile, there will be component supplies of telecommunications ("connection" services) between telecommunications companies to link the two consumers in different jurisdictions combining to make the "whole" of the call between the consumers.

Certain provisions of the GST Act are, therefore, difficult to apply to supplies of telecommunications services, including:

• section 8(2)(a)(ii): the taxation of services physically performed in New Zealand;

• section 11A(1)(j): the zero-rating of services physically performed outside New Zealand; and

• section 11A(1)(k): the exclusion from zero-rating where services are provided directly in connection with movable personal property in New Zealand.

The provisions in this bill will reduce these uncertainties by enacting specific provisions in relation to cross-border telecommunications services.

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